3. Financial situation
In 2010, MTU Aero Engines’ group revenues increased by 3.7% to € 2.7 billion. Revenues in the commercial and military engine business grew by 4.9% and in the commercial maintenance business by 1.6%. MTU’s operating profit increased by 6.5% to € 311.3 million, which is higher than the earnings forecast for the year. Free cash flow continued its upward course and improved even more than expected, rising to € 144.8 million.
The following explanatory comments and analyses are derived from the audited MTU consolidated financial statements for the financial years ending December 31, 2010 and 2009. The consolidated financial statements are drawn up in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), to the extent that these have been adopted by the European Union.
In accordance with IFRS requirements, certain new or revised/amended standards and interpretations were applied for the first time in the financial statements for 2010. Their application did not give rise to any changes with a significant impact on the group’s financial situation, net assets or operating results. Consequently, no changes in the financial reporting principles or in management judgments with respect to the application of the accounting standards had an effect on the group’s business performance in the reporting period.
INFORMATION ON EXCHANGE RATES
The financial data presented in this annual report are stated in euros, U.S. dollars, Canadian dollars, Chinese yuan renminbi or Polish zloty. All currency translations are based on the official exchange rates published by the European Central Bank.
3.1. OPERATING RESULTS
MTU in its present form was created with effect from January 1, 2004, when Kohlberg Kravis Roberts & Co. Ltd. (KKR) purchased 100% of the company’s shares from the then DaimlerChrysler AG. In the context of the acquisition, assets, liabilities and contingent liabilities were identified in accordance with IFRS 3 and measured at fair value. Since then, the identified intangible assets, in particular, have led to considerable scheduled amortization expenses each year. In the following text they are referred to collectively as ‘effects of the purchase price allocation’ and, in order to facilitate comparison, corresponding adjustments have been applied to eliminate them from the indicators presented below.
MTU’s order backlog consists of firm customer orders that commit the group to delivering products or providing services, plus the contractual value of service agreements.
The total volume of book orders amounts to just under € 10 billion and represents a workload of approximately three years.
Group revenues increased in the financial year 2010 by € 96.6 million (3.7%) to € 2,707.4 million. Compared with the previous year, revenues in the commercial and military engine business (OEM), prior to consolidation, rose by € 77.8 million (4.9%) to € 1,663.5 million, while the corresponding revenues in the commercial maintenance business (MRO) grew by € 16.4 million (1.6%) to € 1,074.0 million.
COST OF SALES AND GROSS PROFIT
The cost of sales increased by € 32.3 million (1.5%) to € 2,184.5 million. Since the cost of sales did not grow as fast as sales revenue, gross profit improved to € 522.9 million (2009: € 458.6 million), a year-on-year increase of € 64.3 million (14.0%). The increase in gross profit is also attributable to efficiency measures implemented under the Challenge 2010 program, which enabled direct and indirect production expenses to be reduced. As a result of these improvements, the gross profit margin rose to 19.3% (2009: 17.6%).
RECONCILIATION OF ADJUSTED PERFORMANCE INDICATORS
The main reason for which adjustments are applied is to eliminate the effect of non-recurring items that are superimposed on the results of operating activities and obscure the true comparability of EBIT and other performance indicators for the group and the individual operating sectors with the figures for previous years. Starting out from the unadjusted earnings figures, the respective adjusted values are obtained by adding (expenses) or subtracting (income) the non-recurring items.
Examples of adjusted performance indicators include EBIT (adjusted) and the adjusted EBIT margin. The International Financial Reporting Standards (IFRS) do not stipulate any requirements concerning adjusted performance indicators.
The adjusted performance indicators should not be viewed in isolation as an alternative to the other indicators presented in accordance with IFRS, but as additional information.
Adjusted earnings before interest and tax (EBIT adjusted) are determined by adding the effects of purchase price allocation arising from the company‘s acquisition to earnings before interest and tax (EBIT). Operating profit (EBIT adjusted) increased by 6.5% to € 311.3 million (2009: € 292.3 million), while the adjusted EBIT margin increased by 0.3 percentage points to 11.5% (2009: 11.2%).
Earnings after tax (EAT), after adjustments to eliminate non-recurring items, grew by € 11.8 million to € 182.3 million.
MTU’s financial result decreased by € 1.4 million in the financial year 2010 to a net expense of € -40.8 million (2009: € -39.4 million). Compared with the previous year, there was a marginal deterioration of € 0.5 million in the interest result. The financial result on other items, too, decreased slightly in 2010 by € 0.3 million to a net expense of € -25.1 million (2009: € -24.8 million). The main factors responsible for this change were fair value losses on derivatives amounting to € -8.2 million (2009: fair value gains of € 7.5 million) and negative changes of € -1.3 million (2009: positive changes of € 8.2 million) in the interest component included in the measurement of contingent liabilities. Currency translation gains amounting to € 11.1 million (2009: currency translation losses of € -11.3 million) largely offset these additional charges.
EARNINGS BEFORE TAX (EBT)
The company’s good operating performance had a positive impact on earnings before tax (EBT), which increased by € 19.7 million to € 227.2 million (2009: € 207.5 million).
Income taxes in the financial year 2010 amounted to a total of € 85.0 million (2009: € 66.5 million). The effective group tax rate, relative to earnings before tax, amounted to 37.4 % (2009: 32.0 %). A table showing the reconciliation of the expected tax expense to the actual tax expense can be found in Note 15. to the consolidated financial statements (Income taxes).
EARNINGS AFTER TAX (EAT)
Earnings after tax (EAT) grew by € 1.2 million or 0.9% to € 142.2 million (2009: € 141.0 million).
NET PROFIT AVAILABLE FOR DISTRIBUTION
The net profit available for distribution to MTU shareholders for the financial year 2010 amounted to € 53.6 million. At December 31, 2010, 48,752,407 shares were entitled to receive a dividend (2009: 48,921,808 shares).
EARNINGS PER SHARE
Undiluted earnings per share amounted to € 2.91 (2009: € 2.89). Potential common shares from the convertible bond and the Matching Stock Program diluted these earnings per share. Inclusive of these effects, diluted earnings per share amounted to € 2.83 (2009: € 2.80).
In view of the group’s continuing good business performance, the Board of Management and Supervisory Board of MTU Aero Engines Holding AG will propose to the Annual General Meeting on May 5, 2011 that a dividend of € 1.10 per share (2009: € 0.93) should be paid out to shareholders. The total dividend payment amounts to € 53.6 million (2009, by resolution of the Annual General Meeting: € 45.5 million), after deduction of the proposed allocation to revenue reserves. The net dividend yield for 2010, based on the share price of € 50.61 at December 31, 2010, thus amounts to 2.2%. The dividend is expected to be paid on May 6, 2011 – on condition that the proposal is approved by the Annual General Meeting. A table showing the reconciliation of group earnings after tax (EAT) as defined in IFRS to the net profit available for distribution by MTU Aero Engines Holding AG is provided in the notes to the consolidated financial statements.
The order backlog for the commercial and military engine business (OEM) is reported on the basis of list prices. Given that orders for spare parts for commercial engines are generally fulfilled within a short time of their receipt, the order backlog does not contain a substantial volume of such orders.
COMMERCIAL ENGINE BUSINESS
The invoiced value of MTU’s order book for commercial engines, expressed in U.S. dollars, stood at U.S. $ 4,200.5 million on December 31, 2010, and therefore U.S. $ 538.2 million (14.7%) higher than the previous year’s figure of U.S. $ 3,662.3 million.
The order backlog translated into euros at the 2010 year-end closing rate increased by € 601.4 million (23.7%) to € 3,143.6 million (2009: € 2,542.2 million).
The order backlog for commercial engines represents slightly over two years’ production capacity.
MILITARY ENGINE BUSINESS
In the case of military programs, the customer typically places an order for a fixed number of engines at the time the production agreement is concluded. The full value of the contract flows into the order backlog when the contract is signed. This order backlog reduces over a prolonged period of time, in line with deliveries.
The backlog of orders for military engines, which are priced in euros, totaled € 1,187.9 million at year-end 2010. This is € 235.0 million (16.5%) below the previous year’s amount of € 1,422.9 million.
The order backlog for military engines similarly represents slightly over two years’ production capacity.
The company generated revenues of € 1,663.5 million in the OEM segment. This is € 77.8 million (4.9%) more than the result achieved in 2009.
In 2010, revenues in the commercial engine business increased by € 123.9 million (11.0%) to € 1,177.6 million, mainly due to initial revenues from the GEnx program and rising deliveries of V2500 and PW2000 engines. Adjusted for the effect of the U.S. dollar exchange rate, revenues grew by around 6.2%.
Revenues in the military engine business decreased by € 46.1 million (8.7%) from € 532.0 million in 2009 to € 485.9 million in 2010. The ongoing entry into service of the Eurofighter assures a steady flow of revenue from the EJ200 engine; however, revenues from other military programs have decreased.
EBIT (ADJUSTED) AND EBIT MARGIN
Against a difficult economic backdrop, adjusted earnings before interest and tax (EBIT adjusted) in the OEM segment increased negligibly, from € 229.2 million to € 229.6 million. The adjusted EBIT margin fell from 14.5% to 13.8%.
Capital expenditure on intangible assets and property, plant and equipment decreased by 17.3% to € 84.1 million (2009: € 101.7 million).
The number of employees, calculated as a quarterly average, remained virtually unchanged at 4,912 (2009: 4,908).
ORDER BACKLOG AND VALUE OF CONTRACTS
The order backlog for commercial maintenance consists of orders for work on engines that have been delivered to the maintenance shop and where failure analysis has been completed.
Future orders under long-term service agreements are not included in the order backlog. For this reason, in addition to the narrowly defined order backlog, MTU also discloses in its statements the expected value of orders for work on engines for which maintenance agreements are in place.
The sum total of order backlog and value of contracts represents a workload of slightly less than five years. The majority of contracts in the MRO segment are priced in U.S. dollars. The order backlog for the commercial maintenance business in 2010 amounted to U.S. $ 237.4 million, which is U.S. $ 30.3 million or 11.3% lower than 2009’s figure of U.S. $ 267.7 million. The value of orders for work on engines for which maintenance agreements are in place increased by 2.6% to U.S. $ 6,934.7 million in the year under review.
Translated into euros, the order backlog and value of contracts increased by € 489.6 million (10.0%) to € 5,367.6 million (2009: € 4,878.0 million) at the end of 2010.
MTU’s revenues from the commercial maintenance business in the financial year 2010 amounted to € 1,074.0 million (2009: € 1,057.6 million). Lower revenues at the Hannover location were offset by rising capacity utilization at MTU Maintenance Berlin-Brandenburg and more especially in Vancouver, the latter as a result of the KC-10 maintenance contract.
EBIT (ADJUSTED) AND EBIT MARGIN
Adjusted earnings before interest and tax (EBIT adjusted) in the MRO segment increased by € 15.0 million (23.0%) to € 80.3 million. The EBIT margin rose to 7.5% (2009: 6.2%).
Capital expenditure on intangible assets and property, plant and equipment decreased by 34.5% to € 25.3 million (2009: € 38.6 million).
The number of employees, calculated as a quarterly average, increased by 6.6% to 2,890 (2009: 2,710).
3.2. FINANCIAL SITUATION
PRINCIPLES AND OBJECTIVES OF FINANCIAL MANAGEMENT
The main objectives of financial management are to ensure the constant availability of adequate liquid reserves, avoid financial risks, and diversify sources of financing in the interests of flexibility. Measures to safeguard liquidity are based on forward financial planning over a period of several years. MTU also makes use of various internal and external funding instruments.
The factors considered when choosing financial instruments include flexibility, credit terms, the profile of maturity dates, and borrowing costs. In keeping with standard banking practice, the main sources of financing include covenants requiring the company to ensure that its performance indicators remain within defined limits. MTU has complied with the contractual obligations arising from such covenants both at December 31, 2010 and at the end of every quarter. Further information on agreed covenants is provided in Note 33. to the consolidated financial statements (Financial liabilities). Significant agreements relating to change of control subsequent to a takeover bid are dealt with in Section 7. (Other disclosures).
In Section 6. (Risk report) of the group management report and Note 41. to the consolidated financial statements (Risk management and derivative financial instruments), information is provided on MTU’s approach to credit and valuation risks, methods used to hedge risks associated with interest rates and foreign currencies, and methods of dealing with price-change, non-payment and liquidity risks.
The banking policy including procedures for the approval of banking relationships, loan agreements, worldwide liquidity and asset management, the management of currency and interest rate risks, and the management of the group’s internal cash flow are set down in the treasury principles. It is a basic principle of the group that its lines of credit are administered at corporate level. By centralizing the liquidity management function, the group is in a position to allocate resources efficiently within the organization. As a rule, the group’s financial liabilities are not secured by collateral.
The group maintains good business relationships with a number of different partner lending banks, and in this way avoids being too strongly dependent on a single institution. The banking partners with whom the group and its affiliates conduct business are required to have a long-term credit rating of at least ‘investment grade’.
The banking and financial crisis had no impact on the group’s overall financial situation.
A sensitivity analysis of risk concentration based on credit, market and liquidity risks is presented in Note 41. to the consolidated financial statements (Risk management and derivative financial instruments).
NET FINANCIAL DEBIT
Net financial debt serves as an indicator of the MTU group’s overall liquidity and is defined as the difference between gross financial debt and current financial assets. MTU’s net financial debt at December 31, 2010 amounted to € 56.2 million. This represents a year-on-year decrease of € 86.2 million or 60.5 % (Dec. 31, 2009: € 142.4 million), as a result of the company’s high cash flow. Significant items were the partial repayment of the company’s promissory notes, the full repayment of the loan made by the province of British Columbia to MTU Maintenance Ltd., Richmond, Canada, and the acquisition of financial assets not measured at fair value through profit or loss.
The convertible bond has a par value of € 180.0 million (divided into 1,800 units each with a par value of € 100,000) and a term to maturity of five years. The units of the bond are scheduled for repayment on February 1, 2012 (date of final maturity) at par value plus interest accrued up to that date, unless they are repaid, converted, or repurchased and invalidated prior to the date of final maturity. The units of the bond can be converted into registered non-par value common shares in the company at a pro rata amount (€ 1 per share) of the company’s total share capital.
At a conversion price of € 49.50, the conversion ratio at issue date was 2,020.20 shares. The coupon rate is fixed at 2.75%, payable yearly on February 1. The issuing company is Amsterdam-based MTU Aero Engines Finance B.V.
In the period from September 17 to October 31, 2008, MTU repurchased units of its own convertible bond on the market for a total nominal volume of € 27.2 million, prior to their final maturity. The total price paid for these securities amounted to € 21.9 million (including transaction costs but excluding interest at the coupon rate), which corresponds to an average of 80.7% of the bond units’ nominal value. This amount was divided into an equity portion and a liabilities portion. On June 23, 2010, one holder of the convertible bond exercised their conversion option, converting a nominal amount of € 100,000 into 2,020 shares. The remaining outstanding units of the convertible bond with a total nominal value of € 152.7 million (2009: € 152.8 million) are recognized at amortized cost. More detailed information, including the calculation of the equity and liability components of the repur-chased units of the bond, is provided in Note 33. to the consolidated financial statements (Financial liabilities).
FINANCIAL LIABILITIES TO BANKS
On June 3, 2009, MTU placed four promissory notes for a total nominal note amount of € 65.0 million. Through these promissory notes, which consist of four tranches with fixed maturity dates as listed below, the group aims to diversify its sources of financing:
The promissory notes were recognized at their fair value on the date of acquisition, which corresponds to the nominal note amount, less transaction costs amounting to € 0.4 million. The promissory notes are measured at amortized cost.
At December 31, 2010 the group had not drawn down any funds under its revolving credit facility
(2009: € 0.0)
The other liabilities to banks amounting to € 34.4 million (2009: € 14.6 million) relate to third-party loans provided to subsidiaries. In total, financial liabilities to banks decreased by € 20.3 million to € 59.7 million (2009: € 80.0 million)
FINANCE LEASE LIABILITIES
Finance lease liabilities represent obligations under finance lease arrangements that are capitalized and amortized using the effective interest method. For information on the accounting treatment of lease assets and a summary of capitalized lease assets, please refer to Note 5.7. (Leasing) and Note 20. (Property, plant and equipment) to the consolidated financial statements.
LOAN FROM THE PROVINCE OF BRITISH COLUMBIA
The loan from the province of British Columbia to MTU Maintenance Canada Ltd., Richmond, Canada, was repaid in full on December 17, 2010.
DERIVATIVE FINANCIAL ASSETS AND LIABILITIES
In the financial year 2010, 80% of the net surplus income denominated in U.S. dollars, after deduction of expenses denominated in U.S. dollars, was covered by hedging transactions. At December 31, 2010, hedging transactions were in place for the financial years 2011 and 2012 covering 71% and 43% respectively of the surplus U.S. dollar income. At the same date, further arrangements were in place to cover an average of 12% of the expected surplus U.S. dollar income in the financial years 2013 to 2015.
The increase of € 12.7 million in derivative financial liabilities to € 24.9 million (2009: € 12.2 million) relates principally to changes in the fair value of forward foreign exchange contracts and currency options used to hedge cash flows.
The derivative financial assets mainly comprise fair value gains on forward foreign exchange trans-actions and forward commodity sales contracts for nickel concluded for hedging purposes. Derivative financial assets increased by € 5.2 million to € 21.8 million (2009: € 16.6 million) as a result of market-related changes in the euro / U.S. dollar exchange rate.
For further information on credit and market risks arising from derivative financial assets and liabilities, please refer to Note 41. to the consolidated financial statements (Risk management and derivative financial instruments).
ANALYSIS OF CAPITAL EXPENDITURE
CAPITAL EXPENDITURE BY CLASS OF ASSET
Capital expenditure comprised € 24.6 million (2009: € 24.6 million) on intangible assets, € 84.8million (2009: € 115.7 million) on property, plant and equipment, and € 2.6 million (2009: € 3.0 million) on financial assets.
CAPITAL EXPENDITURE ON INTANGIBLE ASSETS
MTU’s participation in the development costs of General Electric’s GE38 helicopter engine project secured it an 18 % share in the program. Development costs amounting to € 6.9 million arising under this program in 2010 (2009: € 8.3 million) are included in the capital expenditure on intangible assets for the OEM business.
In 2008, on the basis of a cooperation agreement between the General Electric Company and MTU Aero Engines GmbH, Munich, MTU acquired a 6.65 % stake in the GEnx engine program for the Boeing 787 and 747-8. In the financial year 2010, additional internally generated development costs of € 7.1 million (2009: € 4.3 million) were capitalized.
The commercial MRO business develops special repair techniques designed to reduce the cost and increase the efficiency of engine maintenance. Development costs for these technologies totaling € 5.1 million (2009: € 4.8 million) were capitalized as intangible assets in 2010.
A full presentation of capital expenditure on intangible assets, which totaled € 24.6 million in 2010 (2009: € 24.6 million) is provided in Note 18. to the consolidated financial statements (Analysis of changes in intangible assets, property, plant and equipment, and financial assets).
CAPITAL EXPENDITURE ON PROPERTY, PLANT AND EQUIPMENT
The capital expenditure on technical equipment, plant and machinery totaling € 24.1 million (2009: € 21.9 million) relates mainly to the purchase of CNC lathes and grinding/milling machines.
Additions to this item in the financial year 2010 totaling € 28.8 million (2009: € 46.4 million) relate to work in progress on technical equipment, plant and machinery for new engine programs at the German sites and to the modernization of a test rig in Munich.
A full presentation of capital expenditure on property, plant and equipment, which totaled € 84.8 million in 2010 (2009: € 115.7 million) is provided in Note 18. to the consolidated financial statements (Analysis of changes in intangible assets, property, plant and equipment, and financial assets).
MTU uses free cash flow as an indicator of its liquidity, defining it as cash flow from operating activities less capital expenditure on intangible assets, property, plant and equipment, and financial assets.
CASH FLOW FROM OPERATING ACTIVITIES
Cash flow from operating activities in 2010 was marginally lower than the previous year’s level of € 252.7 million, reducing by € 1.4 million or 0.6 % to € 251.3 million.
CASH FLOW FROM INVESTING ACTIVITIES
Cash flow from investing activities increased by € 40.7 million (30.7 %) to € 173.2 million (2009: € 132.5 million) as a result of the expenditure described in the foregoing analysis of capital expenditure, and includes capital expenditure on financial assets amounting to € 69.3 million. Cash flow from investing activities also includes proceeds from the disposal of property, plant and equipment amounting to € 5.0 million (2009: € 10.8 million).
FREE CASH FLOW
Free cash flow in 2010 totaled € 144.8 million (2009: € 120.2 million). In the financial year 2010, the majority of the free cash flow was used to cover the dividend payment of € 45.5 million for the financial year 2009 (€ 45.4 million for the financial year 2008), the partial repayment of promissory notes amounting to € 40.0 million (2009: proceeds from the raising of promissory notes amounting to € 64.6 million), and the purchase of additional treasury shares in the amount of € 13.6 million. Further explanatory comments on the repayment of financial liabilities is provided in Note 33. to the consolidated financial statements (Financial liabilities).
3.3. NET ASSETS
Total assets grew year-on-year by € 277.0 million (8.8%) to € 3,426.1 million (2009: € 3,149.1 million), while the equity ratio increased as a result of the operating results to 23.% (2009: 23.2%).
CHANGES IN BALANCE SHEET ITEMS
On the assets side of the balance sheet, intangible assets and property, plant and equipment decreased by a total of € 20.0 million or 1.1% to € 1,784.9 million (2009: € 1,804.9 million). Intangible assets decreased by € 22.8 million, due to the fact that scheduled amortization charges exceeded additions. Property, plant and equipment increased moderately by € 2.8 million as a result of capital expenditure.
In 2010, inventories grew by € 52.3 million or 8.1% to € 701.0 million (2009: € 648.7 million). Inventories of raw materials and supplies increased by € 14.3 million to € 323.1 million (2009: € 308.8 million) and work in progress, at € 347.4 million, was € 41.4 million higher than the previous year’s amount of € 306.0 million. Advance payments fell by € 3.4 million to € 30.5 million (2009: € 33.9 million). Inventories accounted for 20.5% of net assets, virtually unchanged from the 2009 figure of 20.6%. Inventory turnover remained at the previous year’s level of 4.0%. Trade receivables, construction contract receivables (after deduction of advance payments) and other current assets including advance payments rose year-on-year by € 245.1 million (45.8%) to € 779.8 million. Of these, trade receivables grew by € 140.7 million (36.0%) to € 531.9 million. In total, construction contract receivables, net of the corresponding advance payments, increased year on year by € 39.8 million (40.4%) to € 138.2 million.
Financial assets increased by € 79.3 million (325 %) to € 103.7 million.
Cash and cash equivalents amounted to € 111.9 million at the balance sheet date (2009: € 120.8 million). Expressed as a percentage of total assets, this item decreased to 3.3% (2009: 3.8%).
In terms of the structure of assets, the proportion of non-current assets decreased by 5.1 percentage points to 53.5% (2009: 58.6%).
POSITIVE CHANGES IN GROUP EQUITY
The overall increase of € 88.6 million in group equity in 2010 (2009: increase of € 113.3 million) is mainly attributable to the earnings after tax (EAT) generated in the financial year, which amounted to € 142.2 million (2009: € 141.0 million). Individual positive changes in equity include an amount of € 2.5 million relating to shares sold to employees under the MAP stock option program. Translation differences resulted in an increase of € 9.1 million in group equity (2009: reduction of € 2.3 million).
NEGATIVE CHANGES IN GROUP EQUITY
Negative changes in group equity include an amount of € 45.5 million for the dividend payment to shareholders of MTU Aero Engines Holding AG for the financial year 2009 (€ 45.4 million for the financial year 2008). Further negative changes in group equity include the amount of € 3.9 million from fair value losses on cash flow hedges (2009: positive change of € 14.2 million) and losses of € 2.2 million relating to the fair-value measurement and issue of treasury shares under the Matching Stock Program (MSP) and the Share Matching Plan (SMP). A breakdown of the share-based compensation components is provided in Note 29.4. to the consolidated financial statements (Capital reserves). The purchase of treasury shares resulted in a € 13.6 million reduction in group equity.
CHANGES IN THE FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS RECOGNIZED UNDER OTHER COMPREHENSIVE INCOME (OCI)
At December 31, 2010, the nominal amount of the outstanding portfolio of hedging instruments classified as cash flow hedges in accordance with IAS 39 amounted to U.S. $ 1,310.0 million, serving as a hedge against changes in the exchange rate parity between this currency and the euro. Measurement of the fair value of the MTU cash flow hedge portfolio at the end of 2010, based on the euro / U.S. dollar exchange rate of 1.34 prevailing at the balance sheet date, resulted in a negative change of € 3.9 million in the fair value recognized under other comprehensive income (OCI) compared with December 31, 2009. In the previous year, the measurement based on the euro / U.S. dollar exchange rate of 1.44 prevailing at the balance sheet date had resulted in a positive change in the fair value recognized under OCI of € 14.2 million. Positive changes in the fair value (net of taxes) of cash flow hedges are recognized under financial assets, whereas negative changes in the fair value (net of taxes) of cash flow hedges are included in financial liabilities. Changes in the fair value of cash flow hedges at the end of the financial year are recognized directly in equity as an adjustment to OCI. These adjustments are applied net of the corresponding changes in deferred tax assets (for cash flow hedges with a negative change in fair value) or in deferred tax liabilities (for cash flow hedges with a positive change in fair value).
Medium- to long-term debt capital increased by € 7.9 million (0.7%) to € 1,096.6 million, its share in total equity and liabilities falling by 2.6 percentage points to 32.0 % (2009: 34.6%). In total, non-current provisions remained at the previous year’s level of € 549.0 million. This figure includes pension provisions amounting to € 409.0 million (2009: € 389.9 million), which had increased as expected by € 19.1 million (4.9%). Non-current other provisions decreased by € 19.1 million (12.0%) to € 140.0 million (2009: € 159.1 million) at December 31, 2010, mainly as a result of the measurement of contingent liabilities arising from business combinations. Changes in contingent liabilities are presented in more detail in Note 32. to the consolidated financial statements (Other provisions).
Medium- to long-term liabilities in the amount of € 547.6 million (2009: € 539.7 million) principally comprised financial liabilities amounting to € 204.7 million (2009: € 238.8 million) and deferred tax liabilities of € 231.5 million (2009: € 266.9 million).
The combined total of equity and medium- to long-term debt capital increased in the financial year 2010 by € 96.5 million (5.3%) to € 1,915.9 million (2009: €1,819.4 million). This means that 104.5% (2009: 98.6%) of the company’s non-current assets are matched by financing funds available on a medium- to long-term basis.
Short-term debt capital rose by € 180.5 million (13.6%) to € 1,510.2 million, whereas provisions and income tax liabilities fell by € 0.7 million (0.2%) to € 295.5 million. This item includes pension provisions amounting to € 24.2 million (2009: € 21.7 million), current other provisions amounting to € 200.1 million, which decreased by € 61.9 million (23.6%) compared with the previous year, and income tax payable, which increased from € 12.5 million to € 71.2 million as a result of the improved operating profit. Current liabilities increased by € 181.2 million (17.5%) to € 1,214.7 million. These include obligations toward employees totaling € 39.2 million (2009: € 39.2 million), financial liabilities amounting to € 57.2 million (2009: € 41.0 million), trade payables amounting to € 424.5 million (2009: € 320.9 million), the balance of construction contract payables after deduction of the corresponding receivables amounting to € 666.3 million (2009: € 607.0 million), and sundry other identifiable obligations.
Within the structure of equity and financial debt, the equity ratio increased by 0.7 percentage points to 23.9% (2009: 23.2%), while short-term debt capital increased by 1.9 percentage points. Overall, there has been a shift in the structure away from medium- and long-term toward more short-term debt capital.
3.4. MAJOR EVENTS AFFECTING BUSINESS PERFORMANCE
Earnings for the financial year 2010 were not affected by any significant non-recurring factors.
3.5. COMPARISON OF ACTUAL FORECAST BUSINESS PERFORMANCE
The original forecast for business performance issued on February 24, 2010 was based on the expectation that revenues and performance indicators would remain stable. All of the criteria of this forecast were exceeded. Compared with the revised forecast of October 26, 2010, actual revenues of € 2,707.4 million were 1.5 % lower than expected. Despite the unfavorable development of exchange rate parities in the course of the financial year, operating profit (EBIT adjusted), at € 311.3 million, exceeded the forecast, as did the EBIT margin of 11.5 %. Thanks to the good operating result, earnings after tax (EAT), at € 142.2 million, were slightly higher than expected. Free cash flow in the financial year 2010 amounted to € 144.8 million, 20.7 % more than predicted.
3.6. OVERALL ASSESSMENT OF BUSINESS PERFORMANCE IN 2010
The global economy has been recovering from the effects of the financial crisis since mid-2009, with the pace of recovery differing from region to region. In this economic climate, MTU’s revenues increased by 3.7% in the financial year 2010. Operating profit rose to € 311.3 million (2009: € 292.3 million). This reflects not only the effect of the stronger market but also additional expenditure on new engine programs, and hence active measures to safeguard the company’s future. Despite these negative factors, MTU nevertheless achieved an operating margin of 11.5%. Free cash flow once again developed very positively, reaching around € 145 million, which helped to further reduce net financial debt. All in all, the group’s key performance indicators surpassed the forecasts made in the course of the year.